Q: What Are the Different Types of Payroll Deductions?

A payroll deduction is money taken from an employee’s paycheck to pay for taxes, benefits, or other fees.

There are three main types of payroll deductions:

  • Pre-tax deductions and contributions
  • Local, state, and federal taxes
  • Post-tax deductions and contributions

Here’s a quick breakdown of the different types of payroll deductions and how they work:

1. Pre-tax deductions

A pre-tax deduction is money that is taken out of your employee’s gross pay before any taxes are withheld from their paycheck.

Pre-tax deductions reduce an employee’s taxable income, which means they will likely owe less income tax and/or FICA tax (which includes Social Security and Medicare).

Pre-tax deductions can also lower employer-paid taxes, like FUTA (the Federal Unemployment Tax), FICA, and SUI.

Not all pre-tax deductions are the same. Some deductions are considered pre-tax for all taxes, while others may still require certain taxes to be withheld.

Common pre-tax deductions/contributions include:

  • Retirement funds. Contributions to some retirement funds like a traditional 401(k) can be a pre-tax deduction.
  • Health insurance. Health benefits, like health insurance or FSA or HSA plans, may allow pre-tax deductions. If your employee pays for health insurance through a health plan offered at your company, then those contributions could be pre-tax.
  • Commuter benefits. Some commuter benefits are eligible to be pre-tax deductions, within certain limitations.

2. Employee withholding taxes

Federal, state, and some local taxes are withheld from an employee’s pay on each paycheck. These can include:

  • Federal income tax
  • State income tax (in states with income tax)
  • Any applicable local taxes at the city, county, or municipality level
  • Employee’s share of FICA (Medicare and Social Security taxes)

3. Post-tax deductions

A post-tax deduction is money that is taken out of your employee’s paycheck after all applicable taxes have been withheld.

Common post-tax deductions include:

  • Retirement funds. Some retirement funds are post-tax, like a Roth 401(k).
  • Wage garnishments. If your employee is subject to court-ordered garnishments, then those funds will be removed after their taxes have been withheld.

For an example of where payroll deductions appear on paychecks, watch the video below:

Remember, you don’t have to calculate all this information on your own. Calculating a paycheck can get tricky, so it’s always best to consult a CPA or use a payroll provider to make sure everything is deducted correctly.

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